Reasons and Consequences of Failure to recommendations for Public Institutions by OAG

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1 Reasons and Consequences of Failure to recommendations for Public Institutions by OAG PhD, candidate Albulena Shala, Asistenc accounting and finance department, University of Pristina, Kosovo Prof.Dr.Asc. Hysen Ismajli, Prof. Asc. accounting and finance department, University of Pristina, Kosovo PhD, candidate Arbana Sahiti Asistenc accounting and finance department, University of Pristina, Kosovo ABSTRACT Right management of public finances is a very important factor for a functioning democracy. Concept of accountability in public resources is very important in the management of former public. In our country one of simultaneously measuring oversight mechanisms and the manner of spending public money from government institutions, are the annual audit of financial statements audited by the Office of the Auditor General (OAG). Besides, this audit office also provides a large number of recommendations. The purpose of this paper is to study the reasons of failure of the other recommendations by the Office of Auditor General Public institutions and the consequences of failure of these recommendations. Keywords: External audit, the auditor's recommendations, the importance of auditing, the implementation of the recommendations of the OAG. INTRODUCTION Public institutions, whenever the realization of their spend public money, are obliged to be transparent. We can not talk on transparence of spending public money without mentioning the role of external audit, as an extremely important factor for a country like Kosovo, which has a high degree of mismanagement of public money. Existence of Audit Institutions, increased transparency of expenditure of public money. The purpose of this paper is that through this research to present the importance of this institution, for a place like Kosovo. In accordance with such activities through this study we tried to elaborate the importance of the existence of the office of state auditor general in a country where the challenge of this office are numerous. Failure to implement recommendations to the Office of the Auditor General is a problem That Follows for years at a level so low about 30% annually. The object of our study have been five reports of the auditor of the Government of Kosovo Minister for a period ( ) respectively recommendations for these ministries, and the number of enforcement on them. This paper briefly introduces the OAG activity for a period of three years, the number of audits carried out and kind of opinion poll data during this period. Constantly increasing numbers of audits conducted by this office, but not the number of implementation recommendations. The history of auditing in the world Like any other area the audit has a long history of its development through time. The word audit comes from the Latin word "audire" which means a hearing. The audit was presented Society for Business Research Promotion 40

2 before 2000 years, first in Egypt, then Greece, Rome and gradually in other countries (Porter, Simon & Hatherly, 2000). Development of external auditing began in the fifteenth century in Italy. (William F Messier Jr., 2000). Audit occurred in other countries. In 1953 in England was founded the first professional organization of auditors (accountants). In the United States of America, intensive development of the audit to begin in 1887, which was founded in New York American Association of First Auditors. Of course besides the external audit is also conducted internal audit. Many institutions were established professional internal auditing. The first Institute was established in New York in 1941, "The Institute of Internal Auditors (IIA)". The institute has an international character and his goal is to contribute to the development of internal audit, or internal auditing standards. In 1953 in Havana, Cuba, was established INTOSAI which now has headquarters in Vienna, Austria. It was founded by 34 organizations to audit and are currently over 170 members of them. There are several types of audits, classification is also one of the great: operational audits, audit of financial statements, audit compliance. (Porter, Simon & Hatherly, 2000). The value of an external audit of financial statement users that gives credibility to financial information prepared by the management of public entities. This confidence arises from three forms of control which provides an audit: a) Preventive control-workers who are involved in the preparation of financial data, which are the subject of an auditor is likely to be too careful with their work than workers who are not audited for their work. b) Detective control, even if workers prepare the financial data of carefully errors may occur. The auditor can detect these errors during the audit and notify management of their existence. They then retrieve these errors before the published financial statements. c) Reporting control-if the audit report, the auditor determines that there are material errors in financial statements and refers to this document, and if they refuse to improve these errors, then the audience through his opinion of the auditor's report giving the reasons for this conclusion. Of course, users of financial statements, the auditor's opinion through this have become aware that the information given is not credible Development of Auditing in Kosovo Audit as a new field in Kosovo, has begun to take the first steps after the 1999 war. Before this period, something formal about this area was not organized. With the establishment of many institutions were founded the Office of the Auditor General of Kosovo, which is the highest institution of economic and financial control in Kosovo. Office of the Auditor General was established as an independent institution with UNMIK Regulation nr.2002/18 based on Chapter 11.1 of the Constitutional Framework, UNMIK Regulation 2001/9. Under these provisions OAG has reported directly to the Secretary General of the United Nations which has made the name of the Auditor General in November With the adoption of the Constitution of the Republic of Kosovo (Article 136) ZAP constitutional institution defined as Independent economic and financial control of public institutions and report only the Assembly of Kosovo. OAG shall annually conduct an audit of the regularity of the Kosovo Consolidated Budget, and other subjects which are more than 50% publicly owned or receive funding from the Kosovo Consolidated Budget, provide dividends or income other. OAG conducts its activity also based on international standards of auditing in the public sector. OAG provides a report to Parliament on the audit of the regularity of the Kosovo Consolidated Budget and each institution or subject to audit by the 31 August after the control period. The Auditor General is appointed by the International Civilian Representative, with a term of 5 years. Naturally, the Auditor General audited. Assembly is, respectively the chairman of the Society for Business Research Promotion 41

3 Budget and Finance Committee, who shall appoint an external auditor to audit the financial statements of the OAG. OAG failed to join-in INTOSAI or EUROSAI-in because Kosovo is not yet a member of the United Nations. Under the "Law on Public Financial Management" Office of the Auditor General should have the internal auditor. Internal Auditor was appointed in March Office of the Auditor General has to branch funding from these sources: From the Kosovo Consolidated Budget, the fourth pillar of UNMIK (ICO replaced by mid- 2008), the EAR. In 2008, the funding of this office also attended the International Civilian Office (ICO), and the European Commission Liaison Office (ECLO). Regarding the staff of the Office of the Auditor General, the number of auditors thankfully is growing from year to year. OAG continues SCAAK staff training and various training abroad. Increase staff made from year to year, but is even greater depending on the amount of the budget allocated by the Assembly, the Office of the Auditor General. Professional level in the Office of the Auditor General ( ) Category Certified Auditors Certified Accountants Certified Accounts Technicians Trainee Auditors Performance Auditors TOTAL From year to year this office Was Able to Improve Budget management, qual positively affects the improvement of performance in this office, directly in the good of the state Budget. In the Following table shows the number of audits Performed and reported by the Office of the Auditor General for three years. TABLE 1 Audited Entities Regularity Audit KB State Authorities Municipalities (Contracted out) 2 (29) (31) (19) Independent Institutions Outside KB International Management Audits Performance Audits Total Table 1 shows a fairly stable level of audits performed for the last three years. Number of contracted audits has increased significantly. If we turn to data observed participation rates of OAG in 2007 with 64.81% and 35.19% of external contracting (private), who were mainly engaged in the audit of municipalities of Kosovo. The small number of audits undertaken in 2007 is due to the unclear management, limited use of available funds for contracted audits and auditors strike during the summer of 2008 can be understood as explanations. In the year 2008, compared with 2007 OAG's participation had fallen to 45.61% while external contractors were 54.38% participation. In the year 2009 compared with 2008, 1 18 Ministries, the Office of the President, the Administration of the Assembly of Kosova, the Office of the Prime Minister, Tax Administration, Costums, and Prishtina University are included. 2 The number of the municipality audits contracted out to private audit firms. Society for Business Research Promotion 42

4 attendance rose to 58.57% and decreased the participation of external contracting in 41.42%, as a result of increased staff auditors in the Office of the Auditor General and with good use budget. TABLE 2 Auditor Opinions Unqualified opinion Opinions were Unqualified with Emphasis of Matter Qualified Opinions Adverse Opinions Disclaimer of Opinion TOTAL From Table 2, we see that the number of opinions from the audience with "disclaimer opinion" is dominant in both years. This indicates that the auditor lacked sufficient evidence and reliable to formulate an opinion on these statements. If we consider the comparative year 2007 (100%), in 2008 there was an increasing recognition of the public audience: "Unqualified Opinion" at 7.7%, while in 2008, at %. Compared with previous years, this is a clear indication that the quality of external financial reporting is improving. However, there are shortcomings in the reporting processes, which are not so material as to affect the overall quality of the information. Auditor Opinions (2008) 7, 7% Opinion i pakualifikuar 55, 55% 41, 43% 7, 7% 0, 0% 30, 31% Auditor Opinions (2009) 24, 25% Op. i pakua. me theksim te qeshtjes Opinon i kualifikuar Opinion i pakualifikuar Op. i pakua. me theksim te qeshtjes Opinon i kualifikuar 3, 3% 6, 6% 23, 23% Opinon kunder The level of Implementation of recommendations of the Auditor General and the Consequences of Their failure 3 All of the auditor s opinions for 2008 and years have perfundaur parakprake as "not qualified" 4 A municipality has refused to produce the Annual Financial Statements for the year Society for Business Research Promotion 43

5 Year Besides the OAG audit, annually offers concrete recommendations for the institutions which the office of the audit. However, the number of recommendations implemented at These Institutions is of Concern. We analyzed audit reports for Five Very Important minister in the Government, and on the Basis of These reports draw conclusions as to why These recommendations of the Auditor General scarf Apply swimming and the Consequences of failure to implement These recommendations. TABLE 3. No. The five recommendations to the Minister and the level of Their Implementation Ministry of Ministry of Energy Ministry of Ministry of Justice Ministry of Economy and and Mining Education Health Finance Science and Number of Recomm endatio ns Imple mentatio n of Numbe r of Imple mentat ion of Numbe r of Technology Impleme ntation of Number of Imple mentat ion of Num ber of ' Imple mentat ion of ' '' ' For four consecutive years of the Auditor-General Office gave 35 recommendations only in the Ministry of Economy and Finance, but Was carried about 17. Reasons for failure of these recommendations to the Ministry of Economy and Finance are: lack of internal controls related to the former than spending cash, salaries, trips, etc. The capital expenditure. Internal control is defined as a process designed by management of organizations to provide reasonable assurance regarding the provision of arrival: The reliability of Financial Reporting, Efficiency and Effectiveness of Activities, compliance with applicable Laws and Regulationsons. Based on the findings of internal audit controls such as organized at the Ministry of Economy and Finance, does not offer sufficient securities for the ministry to realize its objectives. Also during this period gave consistently auditor recommendation relating to compliance with the Public Procurement Law. The purpose of this law is to ensure the most efficient, transparent and fair use of public funds and public resources in Kosovo by establishing terms and conditions will apply, procedures to be followed, the right to be respected and obligations will be met by individuals, economic operators, enterprises, contracting authorities, concessionaires and public bodies conducting, participating or interested in procurement activities involving or relating to funds and / or resources such. But as a result of lack of internal controls by management to ensure that appropriate procurement procedures (contraction) are properly implemented these recommendations were not implemented and all this reduces the transparency of spending public money and quality service delivery. Another problem that increases the failure of the recommendations was not fully address the recommendations made by the auditor and this has caused the same problems repeated from year to year. Internal audit in the framework of this ministry, as a very important factor not taken into account high-risk areas. Society for Business Research Promotion 44

6 Similar happened in the Ministry of Energy and Mines, where he gave 26 recommendations were implemented but less than half. To the Ministry of Energy and Mines lack of internal audit unit for years, was one of the factors that influenced the lack of implementation of audit recommendations. Breakdown of internal controls related to procurement processes, is another factor that affects the non-recommendations in all those cases where the auditor provides regarding procurement noted. Internal controls were not the right level, for many segments such as travel expenses, capital expenditures, cash expenses, etc. The Gold Coin. In the year 2008 this ministry was not audited at all by the Office of the Auditor General. To the Ministry of Education, Science and Technology, OAG gave a greater number of total 79 recommendations regarding the prosecution, construction management schools, management of telephone costs, official travel expenses, etc. But from all these separate recommendations were implemented 17 of them during this period. Factors that has pushed this very low level implementation of the recommendations has been the late submission of audit reports to the ministry, in 2006 and Malfunctioning of internal control relating to compliance with the Public Procurement Law we have the Minister is a maximum, and this was followed by misuse of public funds. The situation is also alarming to the Ministry of Justice, where he implemented 4 of 32 recommendations as were total. Lack of measures imposed by the managers responsible under this ministry on the audit recommendations are a major concern for the OAG. The audit identified deficiencies in internal controls of the MJ-s. There is internal audit unit, and constantly made recommendations to management, but even these recommendations do not apply. External auditor recommendations were mainly related to asset management, procurement, capital investment etc. But due to lack of internal controls related to financial management and decision-making processes are not implemented the recommendations of external auditors and internal. Ministry of Justice has not yet managed to design and implement proper controls and financial management. The present approach does not provide adequate assurance that the Minister will realize its objectives successfully. With the special emphasis, deficiencies were noted regarding the management of procurement controls, notably supervision on the implementation of capital projects. Malfunction of the audit committee and internal audit unit have been key factors that have contributed to the failure of external audit recommendations. While the minister of health, Were Given 90 recommendations four years, but about 16 Were recommendations implemented. Management of this minister is not Taking seriously the Recommendation of the internal auditor, and internal controls are in a very low level. Obviously the situation is similar to the Minister and other public institutions, this shows the general condition of the number of recommendations that gives the auditor and the extent of their implementation in a year. During the years 2006, 2007 and 2008 were made about 500 recommendations in the year but with a small degree of their application, about 30% annually, and this indicates that the auditor has a small impact on the "clients" of his. If we compare the implementation of the recommendations of the Office of the Auditor General with its counterpart institution, the degree of implementation of recommendations is very, very low. Albanian High Council (SSA) has given a high number of recommendations but also finds a higher implementation of recommendations. For three consecutive years the rate of implementation of recommendations is over 70%. Society for Business Research Promotion 45

7 Fig4. Comparison of degree of implementation of recommendations of the OAG and the SAI ZAP KLSH At the conclusion of this paper think that is of interest that follows to present the degree of implementation of recommendations in several European institutions to audit these data obtained from SSA's reports: More specifically: Former Yugoslav Republic of Macedonia for 2009, have been implemented around 80.1%. Hungary, in 2009, informs that it has made recommendations on the extent of 88%. In Portugal, for the year 2009 are realized to the extent of 46.2%, the recommendations of the auditor, SAI Bangladesh, in 2010, where results are applied at 88.2%, indicating a very high level, the implementation of audit recommendations. Conclusions Lack of internal controls is the main factor that the Minister but also other institutions, not to implement the audit recommendations, other factors are as important as the first are the malfunction of the Internal Audit Unit, a disregard of public procurement law, also worth noting that there is little willingness on the part of management to implement the audit recommendations. Internal control system must be functional to all ministries, for a good internal control assists the management in achieving their objectives in providing better services and better use of public money. Each of the ministries as well as other public institutions should be aimed at improving the control to provide reliable financial reporting, asset protection and observance of laws and regulations. An independent functional units and internal audit should be part of the system of internal control can provide assurance as to the suitability of the system and provide recommendations for improvement. Internal auditing is an important segment of management under which the organization maintains the integrity, efficiency and effectiveness of financial and other systems of management controls. The primary role of Internal Audit Unit is to provide security to management that internal control system functions as intended. All these deviations on the internal audit unit and internal controls have increased the risk of loss and misuse of public money. A portion of responsibility has also OAG, which is not always submitted reports on time, then there are cases where the minister had not audited, then the way they are given and formulate these recommendations and the perception of audit results are not fully comply with internationally recognized standards. Also must exist a relationship developed between the OAG and the audited entity. Assembly, shall hold a hearing with all the management staff of public institutions audited, and take actions to address the parties' liability for breach of the recommendations. Public Society for Business Research Promotion 46

8 Prosecutions to investigate those cases where the Auditor General has identified irregularities or mismanagement of public money. Public institutions should increase the capacity of internal audit and financial control. Should be further strengthened the internal control of expenditures of public money by creating responsibility and accountability mechanisms. Should be strengthened transparency and efficiency of the Public Procurement Office in the Ministries and other public institutions. REFERENCES "Principles of External Auditing" Brenda Porter, Jon Simon, David Hatherly.2000; "Za Prirucnik Revizija auditor Student S Rjesenjima Zadataka" William F. Messier Jr., Zagreb, Reports of the Auditor-The Ministry of Economy and Finance ( ) Reports of the Auditor-MEST ( ); Reports of the Auditor-AM's ( ); Reports of the Auditor-MME's ( ); Reports of the Auditor-MH's ( ); Annual Performance Reports, OAG (2008,2009,2010) http :/ / http :/ / http :/ / oag.rks-gov.net/shqip.htm http :/ / Law on Public Financial Management Law on the Establishment of the Office of the Auditor General and Audit Office of Kosovo Law on Public Procurement in Kosovo Society for Business Research Promotion 47